Following the emergency EU summit, the UK’s exit from the EU is now ‘flexibly’ delayed to the end of October. Parliament is now in recess so expectations are for a quieter week in politics. The immediate risk of a ‘no-deal’ Brexit appears to have been averted. Reports suggesting that Government work preparing for this has been suspended. Markets have shown little response to the news as this extension means an extension of uncertainty which has already weighed on the economy. An extra six months of uncertainty is unlikely to see businesses kick-start investment.
We expect that average earnings will show an increase in the headline rate of income growth to 3.6% annually. This would reflect the tightness that we continue to see in the labour market with delayed corporate investment. Alongside this, another solid rise in employment is also expected though the unemployment rate could also rise slightly. UK inflation is also expected to nudge higher, to 2.0%, with ‘core’ inflation likely to remain at 1.9%. The recent rise in the oil price has helped lift the ‘headline’ rate. In the months ahead, the rise in energy price caps will lend further support to this.
Confidence numbers suggest that UK consumers are becoming increasingly wary about the uncertain political situation, and may be putting off larger purchases. However, retail sales data in the first two months of 2019 suggest they continue to spend. On the back of this, February GDP was better than expected last week, showing growth of 0.2% for the month. We expect a solid 0.4% increase in retail sales for the month. The data may be affected by the timing of Easter, which was far earlier last year.
GBPEUR – 1.1576
GBPUSD – 1.3089
The ECB policy update last week was slightly dovish, but with no change to policy or guidance. Following the ECB meeting, there will perhaps be less focus on the final CPI readings. On Wednesday, the inflation readings are expected to show that both ‘headline’ and ‘core’ readings remain well below the ECB’s 2% target. As a net-exporter, fears of a global slowdown will continue to be critical for the Eurozone economy. Trade balance numbers for February will provide an indication of how much this uncertainty is affecting the real economy. Manufacturing and services PMI surveys will show sentiment trends across the different sectors. Manufacturing in the Eurozone’s largest economies has been weakening since the start of last year. The latest reading may be slightly up after two very poor months. Meanwhile, we expect the services reading to have fallen slightly, but still to show expansion.
Otherwise, with regards to broader themes for financial markets, worries persist around the strength of global growth and its effect on monetary policy. The IMF, earlier this week, cut its estimates for world GDP growth, reflecting slowdowns in China and the Eurozone, and elevated trade tensions. Mr Draghi spoke at the World Bank spring meetings in Washington over the weekend.
EURUSD – 1.1307
EURGBP – 0.8639
Following the release of the FOMC’s minutes for their March meeting, Fed speakers will share their latest thinking. Last week, saw the Fed’s dovish members Bullard and Kashkari both speak in defence of the Fed’s record. This is in contrast to President Trump’s recent calls for rate cuts and his announcement of two controversial names for the Fed Board. This week sees voters Evans, Rosengren and Bullard all speaking. Boston Fed President Rosengren, has recently noted the potential for a weaker international economy to negatively affect the US, citing this as sufficient rationale to pause.
US data will be relatively light this week, with industrial production and retail sales the main releases. Analysts expect 0.2% growth in industrial production, reflecting strength in utilities and extraction. Retail sales are also likely to be positive with growth around 0.8% for the month driven by auto sales and high-street spending. Las week saw inflation rise to 1.9%, boosted by energy prices.
Given policymakers’ focus on global growth, without doubt, the official release of China’s Q1 GDP growth will be watched with interest. It is forecast to be marginally weaker than previously. Though with positive sounds from the IMF, and the stronger than expected trade data last week, it could surprise on the upside. However, the longer-term picture remains uncertain, with the outcome of the US/China talks still in doubt.
GBPUSD – 1.3089
EURUSD – 1.1307
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*Interbank rates correct as at 7 am on the date of publishing